I am looking at using a software installation and configuration management framework/tool to automate building virtual images (based on Windows XP and Windows Server 2003/2008) for developers. Can anyone recommend a good tool/framework to use for this, or any other method that they have found useful (i.e. using an MSI, etc)?

How far do you want to go with this? You can get up and running reasonably well using the Windows AIK and something like Wininstall LE (Google for both) without spending anything, but you'll have to do some of the work yourself. On the other hand, a full automated suite can very quickly and easily get you into silly money territory.

Assuming you have Active Directory in production, group policy software installation policy and MSI files (either off-the-shelf or custom-built) are a cheap way to do automated installs of applications onto computers. Group policy is also a great way to configure the computer and user environment with consistent settings (using security options, administrative templates, startup scripts, mainly).

There are a boatload of tools to build MSI files out there (since some software manufacturers still don't understand that using the OS built-in installer is a good thing... >sigh<). I'm partial to the Windows Installer XML toolset (WiX-- see http://wix.sourceforge.net/) because it's very easy to version the WiX source-code files in a version control repository, create and manipulate them with scripts, etc.